GABY Inc. — Interim / Quarterly Report 2021

Aug 31, 2021

GABY INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (in Canadian dollars)

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NOTICE OF NO AUDITOR REVIEW OF CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Under National Instrument 51‐102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the condensed interim consolidated financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited condensed interim consolidated financial statements of GABY Inc. (the “Corporation”) have been prepared by and are the responsibility of the Corporation’s management.

The Corporation’s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity’s auditor.

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GABY INC.

Condensed Interim Consolidated Statements of Financial Position

GABY INC. Condensed Interim Consolidated Statements of Financial Position
	(Unaudited) (Audited)
	June 30, December 31,
In Canadian dollars Note	2021 2020
ASSETS Current Cash Restricted cash Accounts receivable 4 Inventories 5 Prepaid expenses	3,891,446 102,808 ‐ 83,760 1,254,245 611,107 2,336,025 642,883 389,844 86,857
Non‐current Property and equipment 6 Intangible assets and goodwill 7 Other assets 8	7,871,560 1,527,415 8,992,397 1,095,090 46,718,104 2,392,042 5,998,566 22,086
Total assets	69,580,627 5,036,633
LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Bank indebtedness 10 Accounts payable and accrued liabilities 9,11 Income taxes payable 12 Deferred revenue 13 Short‐term notes payable 14 Promissory notes payable 15 Convertible debentures 16 Current portion of lease liabilities 17 Currentportion of long‐term debt 18	‐ 155,370 8,634,465 7,065,310 1,568,442 61,405 306,370 ‐ 18,611 89,264 265,075 1,411,233 526,116 653,904 640,845 61,504 817,852 85,400
Non‐current liabilities Lease liabilities 17 Long‐term debt 18 Other long‐term liabilities 19	12,777,776 9,583,390 8,628,449 569,157 32,006,419 207,196 6,364,447 16,729
Total liabilities	59,777,091 10,376,472
SHAREHOLDERS’ EQUITY (DEFICIENCY) Share issuance obligation Share capital 21 Contributed surplus 20,21 Deficit Accumulated other comprehensive loss	‐ 119,947 62,740,684 45,074,695 7,998,374 5,721,708 (60,029,741) (55,933,646) (905,781) (322,543)
	9,803,536 (5,339,839)
Total liabilities and shareholders’ equity (deficiency)	69,580,627 5,036,633
Going concern 1 Subsequent events 29

See accompanying notes to the condensed interim consolidated financial statements

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GABY INC.

Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

(Unaudited) In Canadian dollars Note	Three months ended June 30, Six months ended June 30,	Three months ended June 30, Six months ended June 30,
	2021	2020 2021 2020
CONTINUING OPERATIONS
REVENUE, net COST OF SALES Direct inventorycosts 22	11,271,030	740,202 14,682,931 2,189,256 571,794 10,080,384 2,039,523
	7,038,041
Variablegrossprofit	4,232,989	168,408 4,602,547 149,733
Allocated indirect costs 23 Distribution costs	210,938	61,745 276,510 195,174 84,869 145,014 156,392
	76,268
Total cost of sales	7,325,247	718,408 10,501,908 2,391,089
Gross profit (loss) Selling, general and administrative expenses 24 Share‐based compensation and expenses 20 Depreciation ofplant and equipment 6	3,945,783	21,794 4,181,023 (201,833) 1,612,054 4,312,627 3,881,737 (100,322) 664,182 34,392 106,068 221,767 254,167
	3,201,525
	444,110
	211,004
Income (loss) from operations before the **following: **	89,144	(1,596,006) (1,017,553) (4,372,129)
Foreign exchange gain (loss) Gain (loss) on conversion of debt Gain (loss) on disposal of assets Gain on lease termination Interest expense Interest income Recovery of impairment amount Penalties and interest on past‐due taxes Transaction costs Other expense	395,314	26,010 225,430 (36,673) (13,619) 112,077 61,255 963 (7,279) 963 ‐ ‐ 543 (140,447) (1,190,973) (373,889) ‐ 581 ‐ 3,580 ‐ 12,338 (3,578) (94,102) (234,800) ‐ (1,213,046) ‐ ‐ (112,571) ‐
	112,077
	(7,279)
	‐
	(1,055,712)
	‐
	‐
	(75,734)
	(115,537)
	(112,571)
Total other income(expense)	(859,442)	(127,091) (2,279,883) (570,263)
Loss before income tax expense(recovery)	(770,298)	(1,723,097) (3,297,436) (4,942,392)
Current income tax expense Deferred income tax recovery	838,665	219 838,665 5,565 (36,009) (40,006) (99,463)
	(32,698)
Income tax expense(recovery)	805,967	(35,790) 798,659 (93,898)
Net loss from continuing operations	(1,576,265)	(1,687,307) (4,096,095) (4,848,494)
DISCONTINUED OPERATIONS Net loss from discontinued operations		(110,854) ‐ (950,532)
	‐
Net loss Other comprehensive loss, net of tax Items that may be reclassified to net Exchange difference on translation	(1,576,265)	(1,798,161) (4,096,095) (5,799,026) (294,588) (583,238) 713,766
	(583,676)
Total comprehensive loss	(2,159,941)	(2,092,749) (4,679,333) (5,085,260)
Net lossper share:
Basic and diluted 25	($0.00)	($0.01) ($0.01) ($0.03)

See accompanying notes to the condensed interim consolidated financial statements

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GABY INC.

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity (Deficiency)

(Unaudited) In Canadian dollars Note Share issuance obligation Share capital Contributed surplus	Deficit Accumulated other comprehensive income(loss) Total
Balance as at December31,2019 ‐ 43,068,525 5,373,688	(41,943,032) (548,094) 5,951,087
Net and comprehensive loss ‐ ‐ ‐	(5,799,026) 713,766 (5,085,260)
Issuance of shares to settle debts ‐ 1,347,952 ‐	‐ ‐ 1,347,952
Issuance of subscription shares ‐ 250,000 ‐	‐ ‐ 250,000
Stock option and RSU expense 20 ‐ ‐ 2,819	‐ ‐ 2,819
Other share‐based compensation ‐ ‐ (11,295)	‐ ‐ (11,295)
Balance as at June 30, 2020 ‐ 44,666,477 5,365,212	(47,742,058) 165,672 2,455,303
Balance as at December 31, 2020 119,947 45,074,695 5,721,708	(55,933,646) (322,543) (5,339,839)
Net and comprehensive loss ‐ ‐ ‐	(4,096,095) (583,238) (4,679,333)
Issuance of Units 21 (36,187) 3,446,039 560,983	‐ ‐ 3,970,835
Issuance costs 21 ‐ (916,274) 319,703	‐ ‐ (596,571)
Shares for services agreements 20 ‐ 186,038 ‐	‐ ‐ 186,038
RSUs issued as shares 20 ‐ 66,821 (66,821)	‐ ‐ ‐
Equity issued as payment of debts 20 ‐ 657,939 8,000	‐ ‐ 665,939
Issuance of Subscription Receipts 21 8,562,696 ‐ ‐	‐ ‐ 8,562,696
Spin off of Subscription Receipts 21 (8,646,456) 7,435,952 1,210,504	‐ ‐ ‐
Shares issued for business acquisition 21 ‐ 6,789,474 ‐	‐ ‐ 6,789,474
Stock option and RSU expense 20 ‐ ‐ 278,420	‐ ‐ 278,420
Stock option forfeitures 20 ‐ ‐ (34,123)	‐ ‐ (34,123)
Balance as at June 30, 2021 ‐ 62,740,684 7,998,374	(60,029,741) (905,781) 9,803,536

See accompanying notes to the condensed interim consolidated financial statements

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GABY INC.

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited) In Canadian dollars Note	Three months ended June 30, Six months ended June 30,
	2021 2020 2021 2020
OPERATING ACTIVITIES Net loss Adjustments to reconcile net loss to cash flow from operations: Deferred income tax recovery Depreciation 6 Recovery of impairment Loss (gain) on conversion of debt Loss (gain) on disposal of assets Gain on lease termination Interest expense Interest income Share‐based compensation 20 Unrealized foreign exchange loss (gain)	(1,576,265) (1,798,161) (4,096,095) (5,799,026) (32,698) (36,009) (40,006) (99,463) 322,670 119,706 383,861 342,982 ‐ (3,580) ‐ (12,338) (112,077) 13,619 (112,077) (61,255) 7,279 (963) 7,279 (963) ‐ ‐ ‐ (8,261) 1,055,712 141,269 1,190,973 385,925 ‐ ‐ (581) ‐ 306,513 (100,322) 430,335 34,392 (617,710) (2,040) (459,804) 32,329
Cash used in operating activities before the following: Net change in non‐cash working capital related to operations	(646,576) (1,666,481) (2,696,115) (5,185,678) (701,022) 1,578,126 (957,044) 3,762,342
Cash used in operating activities	(1,347,598) (88,355) (3,653,159) (1,423,336)
INVESTING ACTIVITIES Purchase of property and equipment 6 Proceeds from sale of property and equipment Business acquisition – net cash outflow 3 Interest received Deposits received (paid), net	(10,837) (3,446) (10,837) (6,565) 1,228 71,461 1,228 85,461 (2,100,050) ‐ (2,100,050) ‐ 581 ‐ 581 ‐ ‐ (2,043) 1,899 (1,747)
Cashgenerated(used) in investing activities	(2,109,078) 65,972 (2,107,179) 77,149
FINANCING ACTIVITIES Proceeds on promissory notes Proceeds on long‐term debt Repayments to related parties Repayment of short‐term notes payable 14 Repayment of long‐term debt Repayment of lease liabilities 17 Repayment of promissory notes, debentures Issuance of Units 21 Issuance of Subscription Receipts 21 Interest paid	‐ ‐ ‐ 705,788 ‐ 40,000 ‐ 40,000 ‐ ‐ (194,056) ‐ (68,055) ‐ (68,055) ‐ (162,166) (15,022) (182,274) (34,775) (96,455) (39,554) (113,505) (127,278) ‐ ‐ (1,210,992) ‐ ‐ ‐ 4,007,022 250,000 8,321,230 ‐ 8,321,230 ‐ (757,251) (83,857) (972,448) (281,153)
Cashgenerated(used) in financing activities	7,237,303 (98,433) 9,586,922 552,582
Foreign currencytranslation adjustment	(35,920) (339) (37,946) 27,653
Net change in cash Cash, beginning ofperiod	3,744,707 (121,155) 3,788,638 (765,952) 146,739 54,154 102,808 698,951
Cash(Bank indebtedness), end ofperiod	3,891,446 (67,001) 3,891,446 (67,001)

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GABY INC.

Condensed Interim Consolidated Statements of Cash Flows ‐ Continued

(Unaudited) In Canadian dollars Note	As at June 30,
	2021 2020
CASH (BANK INDEBTEDNESS) CONSISTS OF: Cash Bank indebtedness	3,891,446 72,577 ‐ (139,578)
	3,891,446 (67,001)

See accompanying notes to the condensed interim consolidated financial statements See Note 26 for detail of non‐cash transactions and other cash flow disclosures

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

NATURE OF BUSINESS

GABY Inc. (“GABY” or "the Corporation") is incorporated in Canada under the Business Corporations Act of Alberta. The Corporation’s registered office is 200, 209 – 8th Avenue SW, Calgary, Alberta T2P 1B8, Canada and it trades on the Canadian Securities Exchange (“CSE”) under the symbol GABY and on the OTCQB under the symbol GABLF. The Corporation is a holding company with USA subsidiaries, the most significant being Miramar Professional Services Inc. (“Miramar” or “MPS”) and its subsidiary, Wild West Industries Inc. (“Wild West” or “WWI”). Miramar operates a dispensary called Mankind Dispensary, operating in San Diego, California. Through Mankind Dispensary, GABY curates and sells a diverse portfolio of products infused with cannabis, including its own proprietary brands, Kind Republic™ and Lulu’s™, and resells third party brands. Through WWI, the Corporation manufactures certain of its proprietary brands as well as provides manufacturing services to third parties. WWI also provides distribution services to Mankind.

1) GOING CONCERN

These condensed interim consolidated financial statements for the three and six months ended June 30, 2021 and 2020 (“Financial Statements”) have been prepared using International Financial Reporting Standards (“IFRS”) applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they come due.

For the six months ended June 30, 2021 the Corporation had a net loss of $4.1 million and negative cash flow from operations of $3.7 million, in part due to operating two separate distribution and manufacturing facilities (in Santa Rosa and San Diego). For the year ended December 31, 2020 (prior to its expansion into retail), the Corporation had a net loss of $14.0 million and negative cash flow from operations of $1.7 million. As at June 30, 2021 the working capital deficit amounted to $4.9 million. Management believes it will harvest further synergies from the acquisition of Miramar and WWI, the implementation of its consolidation strategy culminating in the recent closure of its Santa Rosa facilities, reaping of additional margins on its proprietary brands through its multi‐vertical infrastructure which spans from manufacturing to retail, and streamlining of shared overhead costs. Management believes these activities, in conjunction with prudent management of working capital, will enable GABY to support operations over the next year and beyond.

Historically, the Corporation has had operating losses, negative cash flows from operations and working capital deficiencies. Whether, and when, the Corporation can attain profitability and positive cash flows from operations is uncertain. These uncertainties cast significant doubt upon the Corporation’s ability to continue as a going concern.

GABY will need to raise capital to service future balloon payments of principal on the debt issued pursuant to the acquisition of Mankind, and to fund growth of its operations and future growth strategy, including future acquisitions as part of its consolidation strategy. While the Corporation has been successful in raising capital in the past, there can be no assurance that it will be able to do so in the future. The ability to raise capital may be adversely impacted by uncertain market conditions including the impact of COVID‐19. To address its financing requirements, the Corporation will seek financing through debt and equity financings, asset sales, and rights offerings to existing shareholders. The outcome of these matters cannot be predicted at this time.

Should the Corporation be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they come due. These Financial Statements do not reflect adjustments to the carrying

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Corporation was unable to realize its assets and settle its liabilities as a going concern in the normal course of operation. These adjustments could be material.

2) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Statement of compliance

These Financial Statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee.

These Financial Statements were approved and authorized for issue by the Corporation’s audit committee on August 30, 2021.

Basis of presentation

These Financial Statements have been prepared under the historical cost convention, except for financial instruments classified as financial instruments at fair value through profit and loss, which are stated at their fair value, and are expressed in Canadian dollars unless otherwise indicated. Other measurement bases used are detailed in the Corporation’s annual consolidated financial statements (“Annual Financial Statements”).

Certain comparative figures have been reclassified to conform to the current period’s presentation.

The notes presented in these Financial Statements include only significant events and transactions occurring since the Corporation’s last fiscal year end and are not fully inclusive of all matters required to be disclosed by IFRS in the Corporation’s annual consolidated financial statements. As a result, these Financial Statements should be read in conjunction with the Annual Financial Statements.

These Financial Statements follow the same accounting policies and methods of application as the most recent Annual Financial Statements with the exception of the following policies adopted or adjusted in the current period due to applicability of additional items as a result of the Mankind acquisition:

Deferred revenue

The Corporation records deferred revenue for rewards points earned by customers at time of product sales and recognizes the amounts as revenue when those points are redeemed. Points outstanding for which the customer has not made a purchase for more than one year are recognized as revenue on the assumption that the points will not be redeemed. The Corporation also includes outstanding gift cards in deferred revenue.

Income taxes

Income tax comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

Deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined on a non‐discounted basis using tax rate and laws that have been enacted or substantively enacted at the statement of financial statement date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income tax assets and liabilities are presented as non‐current.

As the Corporation operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Corporation is only allowed to deduct expenses directly related to the cost of producing the products or cost of production.

The Corporation applies IFRIC 23, Uncertainty over income tax treatments , which is reflected in the following accounting policy.

The Corporation recognizes uncertain income tax positions using a probability‐weighted approach to determine the amount that is more‐likely‐than‐not to be sustained upon examination by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Recognition or measurement is reflected in the period in which the likelihood changes. Any interest and penalties related to unrecognized tax liabilities are presented within income tax expense.

3) BUSINESS ACQUISITION

a) Description

On, April 1, 2021, the Corporation acquired 100% of the issued and outstanding equity of Miramar, a cannabis retailer, which owns 100% of the issued and outstanding equity of Wild West, a cannabis manufacturing and distribution company (together, “Mankind”).

Through the acquisition, the Corporation has secured a Type 10 retail licence (“Type 10 Licence”), a Type 6 manufacturing licence (“Type 6 Licence”), and a Type 11 distribution licence (“Type 11 Licence”) all issued by the Bureau of Cannabis Control in the state of California; the retail and distribution facilities and related assets located in San Diego, California; and the Kind Republic brand recently launched by WWI.

The Corporation is in the process of obtaining a valuation of the underlying assets of Mankind including its property, plant and equipment, intangibles (including the licences), the Kind Republic brand, customer lists and goodwill, and is also determining Mankind’s final working capital balances. The acquisition‐date fair value of the total consideration is estimated as follows:

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

GABY INC. Notes to the Condensed Interim Consolidated Financial Statements In Canadian dollars, unless otherwise stated (Unaudited)
	Note	USD CAD
Cash consideration Share consideration Debt consideration	b) b) b)	5,000,000 6,264,000 5,399,184 6,789,474 25,500,000 32,066,250
		35,899,184 45,119,724
Purchaseprice adjustment – net workingcapital	b)	(763,059) (959,547)
Total estimated consideration		35,136,125 44,160,177
The amounts recognized as of the acquisition date are as follows: Cash Accounts receivable – fair and gross value, estimate 100% recoverable Inventory Prepaid expenses and deposits Property and equipment Security deposits Intangibles – Type 6 and Type 11 Licences Intangibles – Type 10 Licence Net deferred tax liabilities Accounts payable and accrued liabilities Income taxes payable Deferred revenue Lease liabilities Long‐term debt Uncertain tax position liability Indemnification asset ‐ Uncertain taxposition liability	c) 6 7 7 17 18 19 8	3,311,292 4,163,950 21,299 26,783 1,242,056 1,561,885 157,601 198,183 6,698,255 8,423,056 68,273 85,853 1,515,076 1,905,208 1,000,000 1,257,500 (165,525) (208,148) (2,550,335) (3,207,046) (1,296,595) (1,630,468) (196,644) (247,280) (7,068,369) (8,888,474) (864,000) (1,086,480) (4,703,904) (5,915,159) 4,703,904 5,915,159
Net identifiable assets acquired Add: Goodwill	d)	1,872,384 2,354,522 33,263,741 41,805,655
		35,136,125 44,160,177

b) Consideration

The Definitive Agreement provided for the acquisition of all the equity securities of Mankind for total consideration of USD 36.5 million, subject to adjustment in accordance with the Definitive Agreement. The consideration was satisfied as follows:

• (i) the payment of USD 5.0 million in cash;

• (ii) the issuance of 157,894,737 common shares with a deemed value of USD 0.038 per share, constituting USD 6.0 million of the consideration; and

• (iii) the issuance of a secured non‐convertible promissory note for USD 25.5 million bearing interest at a rate of 10% per annum. The promissory note requires quarterly interest‐only payments of the interest incurred in the quarter capped at USD 500,000 per quarter, with any additional interest incurred to be accrued and paid with the next principal payment. The principal is required to be paid as follows: USD 5 million at the end of years two, four, and six, with the remaining USD 10.5 million due at the end of year seven.

The consideration is to be adjusted by the amount by which actual working capital (defined as working capital plus debt)

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

is greater than (less than) target working capital of USD 587,733. The estimated purchase price adjustment is a reduction of the purchase price by USD 763,059, to be transacted through a reduction of quarterly interest payments on the promissory note of no more than USD 150,000 per quarter until the total purchase price adjustment has been satisfied.

c) Acquisition cash flows

ition cash flows
In$	USD CAD
Cash consideration Less cash acquired on acquisition	(5,000,000) (6,264,000) 3,311,292 4,163,950
Net cash outflow – investing activities	(1,688,708) (2,100,050)

d) Goodwill

The composition of goodwill, if recognized, would include knowledge and experience of Mankind in respect of retail operations of cannabis products in the state of California; its established relationship with reputable cannabis manufacturers and distributors, as well as the expected synergies from the combination of Mankind’s retail licence with GABY’s consumer packaged goods expertise in branding. Any goodwill recognized would have $nil tax value.

e) Acquisition costs

Acquisition‐related costs of $1,213,046 that were not directly attributable to the issuance of shares are included in Transaction costs in the statement of loss and comprehensive loss and in operating cash flows in the statement of cash flows.

f) Revenue and loss contribution

Revenue and net income from the Mankind acquisition included in the results of the Corporation for the period from April 1, 2021 to June 30, 2021 were $8,490,694 and $469,567, respectively. The revenue and net loss of the Corporation for the six months ended June 30, 2021 would have been $22,994,619 and $4,210,637, respectively, had the acquisition of Mankind occurred on January 1, 2021.

As of the date of these consolidated financial statements, the determination of fair value of assets and liabilities acquired is based on preliminary estimates and has not been finalized.

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

4) ACCOUNTS RECEIVABLE

ACCOUNTS RECEIVABLE
In$, Balance comprised of: Trade accounts receivable GST receivable Other accounts receivable Sub‐total before allowance Allowance for doubtful accounts Aging of receivables: 30 days 60 days 90 days Over 90 days	Jun 30, 2021 Dec 31,2020
	791,173 888,369 62,476 68,055 760,622 ‐
	1,614,271 956,424 (360,026) (345,317)
	1,254,245 611,107
	914,375 177,852 29,850 9,483 13,657 42,397 656,389 726,692
	1,614,271 956,424

The balance of Other accounts receivable of $760,622 as at June 30, 2021 consists of the amount receivable under the Mankind purchase agreement relating to the net working capital adjustment, which will be applied against future quarterly interest payments on the note payable to the former shareholders of MPS, subject to a limit of USD 150,000 per quarter.

The allowance for doubtful accounts is recorded based on an estimated percentage of each aging bucket that will not ultimately be collected. Accounts that have no activity for one year or more are allowed for at 100%, with the exception of about $400,000 in the over 90 days bucket where the Corporation has arranged with the two customers to reduce the balance by those customers providing products and/or services to the Corporation. The remaining amount in the over 90 days bucket after removing amounts allowed for at 100% is then allowed for at 25%, along with varying smaller percentages being applied to the other aging buckets.

5) INVENTORIES

INVENTORIES
In$, Balance comprised of:	Jun 30, 2021 Dec 31,2020
Raw and semi‐finished materials Packaging materials Finishedgoods	68,625 138,614 103,802 170,174 2,163,598 334,095
	2,336,025 642,883

Inventories expensed for the three and six months ended June 30, 2021 and 2020 are as follows:

	Three months	ended June 30,	Six months ended June 30,	Six months ended June 30,
In$	2021	2020	2021	2020
Inventories expensed – cost of sales	7,325,247	718,408	10,501,908	2,391,089
Inventories expensed – discontinued
operations	‐	12,612	‐	646,593
	7,325,247	731,020	10,501,908	3,037,682

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

6) PROPERTY AND EQUIPMENT

6) PROPERTY AND EQUIPMENT
	Net	book value of property and equipment
	Right‐of use	Right‐of use		All other
	assets ‐	assets ‐	property and
In$	facilities	equipment		equipment	Total
Balance as at December 31, 2019	6,471,210	56,579		857,159	7,384,948
Purchase	‐	‐		6,565	6,565
Disposals	(5,638,437)	(53,579)		(132,696)	(5,824,712)
Depreciation	(250,517)	‐		(92,465)	(342,982)
Effect of foreign exchange1	326,711	‐		52,526	379,237
Balance as at June 30,2020	908,967	3,000		691,089	1,603,056
Balance as at December 31, 2020	527,930	‐		567,160	1,095,090
Business acquisition	7,972,349	‐		450,707	8,423,056
Additions	‐	‐		10,837	10,837
Disposals	‐	‐		(8,507)	(8,507)
Depreciation	(270,361)	‐		(113,500)	(383,861)
Effect of foreign exchange1	(122,924)	‐		(21,294)	(144,218)
Balance as at June 30,2021	8,106,994	‐		885,403	8,992,397

1Foreign exchange difference arising on translation of foreign operation into Canadian dollars.

Depreciation recognized was allocated to the following line items for the six months ended June 30, 2021 and 2020:

	June 30, 2021	June 30, 2020
Cost of sales	162,094	84,181
Depreciation of plant and equipment	221,767	254,167
Loss from discontinued operations	‐	4,634
	383,861	342,982

7) INTANGIBLE ASSETS AND GOODWILL

7) INTANGIBLE ASSETS AND GOODWILL
	Net book value	of intangible assets and goodwill
	Cannabis
	licences and
In$	permits	Goodwill	Total
Balance as at December 31, 2019	2,804,303	4,413,571	7,217,874
Effect of foreign exchange1	139,955	478,180	618,135
Balance as at June 30,2020	2,944,258	4,891,751	7,836,009
Balance as at December 31, 2020	1,020,160	1,371,882	2,392,042
Business acquisition (Note 3)	3,162,708	41,805,655	44,968,363
Effect of foreign exchange1	(69,853)	(572,448)	(642,301)
Balance as at June 30,2021	4,113,015	42,605,089	46,718,104

1Foreign exchange difference arising on translation of foreign operation into Canadian dollars.

14 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

8) OTHER ASSETS

OTHER ASSETS
In$, Balance comprised of:	Jun 30, 2021 Dec 31,2020
Deferred tax asset Indemnification asset Securitydeposits	58,098 ‐ 5,836,134 ‐ 104,334 22,086
	5,998,566 22,086

The indemnification asset was recorded upon acquisition of Mankind in relation to the indemnification agreement received in the Mankind purchase agreement for estimated potential liabilities of Mankind as at the acquisition date for uncertain tax positions. The related liability is included in Other long‐term liabilities.

9) RELATED PARTY TRANSACTIONS

These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. No amounts are owing to or owing from the related parties in respect of the transactions unless otherwise referenced in the table below.

In $ a. Amounts included in Selling, general and administrative expenses:	Three months ended Six months ended
	June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Compensation of key management personnel (“KMP”)1 Cash compensation2 Share‐based compensation, net of forfeitures	155,808 56,667 227,240 357,157 249,201 (107,475) 330,928 (34,727)
Total compensation of KMP Consulting fees to a company controlled by close family of certain KMP3 Contract service fees to a company controlled by close family of certain KMP4 Rent paid to a company controlled by certain KMP b. Amounts included in Interest expense: Interest on convertible debentures to KMP Interest onpromissorynotes to KMP	405,009 (50,808) 558,168 322,430 45,000 45,000 90,000 90,000 18,425 ‐ 18,425 ‐ ‐ ‐ ‐ 10,968 ‐ 3,730 1,274 7,459 ‐ 17,936 5,598 32,597
c. Due to relatedparties included in statement of financialposition Jun 30, 2021 Dec 31, 2020
Included in promissory notes payable: To directors and entities controlled by directors ‐ 780,903 Included in convertible debentures: To entity controlled by directors ‐ 100,000 Included in accounts payable and accrued liabilities Compensation payable to KMP or their separate management entities 231,569 302,305 Other amounts due to KMP (expense reimbursements, etc) 16,647 222,449 Interest payable in respect of b) above ‐ 19,973 Rent payable to a company controlled certain KMP 15,356 15,356 Consultingfeespayable to a companycontrolled bya close familymember of KMP3 ‐ 31,500

1 KMP consist of those that have the authority and responsibility for planning, directing and controlling the activities of the

15 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

Corporation, which includes the most senior executive team (C‐suite executives) and the Corporation’s board of directors (“Board”).

2 Includes $49,760 and $79,760 paid to separate management entities for the three and six months ended June 30, 2021 (three and six months ended June 30, 2020 ‐ $30,000 and $73,333).

3 The Corporation has a month‐to‐month agreement with this related party for $15,000 per month for provision of investor relations and consulting services. The party was selected to perform these services based on expertise in its field

4 The Corporation has a month‐to‐month agreement with this related party for USD 5,000 per month for provision of marketing and other corporate services. The party was selected to perform these services based on expertise in its field

10) BANK INDEBTEDNESS

The demand operating loan that was closed with an outstanding balance in September 2020 as described in the Annual Financial Statements, and which had a balance of $155,370 as at December 31, 2020 including interest up to that date, was assumed by certain KMP effective January 1, 2021. The KMP was compensated for assuming this debt through a corresponding amount receivable from the Corporation, which was later paid in conjunction with the Non‐brokered Private Placement.

11) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

11) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Balance comprised of:	In $
	Jun 30, 2021 Dec 31,2020
Trade accounts payable Credit cards payable Payroll liabilities Accrued liabilities Sales,excise,and use taxespayable	5,301,091 4,902,030 11,338 11,170 369,170 128,412 658,662 671,862 2,294,204 1,351,836
	8,634,465 7,065,310
Aging of trade accounts payable:
30 days 60 days 90 days Over 90 days	2,104,560 524,296 209,224 277,739 121,060 167,250 2,866,247 3,932,745
	5,301,091 4,902,030

16 | P a g e G A B Y I n c .

In Canadian dollars, unless otherwise stated (Unaudited)

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

12) INCOME TAXES PAYABLE

Income tax payable is comprised of the following, based on filed income tax returns or current income tax provisions:

In$	Jun 30, 2021 Dec 31,2020
Federal income tax payable relating to the year 2018 or prior	31,194 54,760
Federal income taxpayable relatingto theyear 2019	6,465 6,645
Federal income tax provision for Mankind stub period1 California income taxprovision for Mankind stubperiod1	749,362 ‐ 223,106 ‐
	972,468 ‐
Federal income tax provision for 2021 to date California income taxprovision for 2021 to date	446,652 ‐ 111,663 ‐
	558,315 ‐
Total income taxpayable	1,568,442 61,405

1 Six months ended March 31, 2021, for cutoff between previous ownership and GABY ownership

The Corporation has recorded a provision for uncertain tax positions relating to the application of IRC Section 280E of $6,124,950 as at June 30, 2021 ($nil as at December 31, 2020) which is included in Other long‐term liabilities in the Condensed Interim Consolidated Statements of Financial Position. The amounts recorded relate to federal income tax for the current and prior open tax years. Of the amount recorded, $5,836,134 is covered by an indemnification agreement in the Mankind purchase agreement as it relates to tax periods before the acquisition date. An indemnification asset of that amount has been recognized in consolidation and is included in Other assets.

13) DEFERRED REVENUE

13) DEFERRED REVENUE
In$, Balance comprised of:	Jun 30, 2021 Dec 31,2020
Outstanding rewards points, net1 Outstanding gift cards Payments received in advance	236,346 ‐ 21,091 ‐ 48,933 ‐
	306,370 ‐

1 Net of estimate of points that will not be redeemed of $665,976 as at June 30, 2021 (December 31, 2020 – n/a)

14) SHORT‐TERM NOTES PAYABLE

14) SHORT‐TERM NOTES PAYABLE
Note	In $
	Jun 30, 2021 Dec 31,2020
Promissorynotespayable of USD 15,000(December 31,2020 – USD 70,000) a	18,611 89,264

• a) Consisted of three non‐interest‐bearing short‐term notes payable due on closing of next financing transaction undertaken by the Corporation generating proceeds of at least $500,000, which occurred in February 2021. Two of the notes payable were repaid in the current period, leaving one note payable of USD 15,000 due on demand.

17 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

15) PROMISSORY NOTES PAYABLE

15) PROMISSORY NOTES PAYABLE
Note	In $
	Jun 30, 2021 Dec 31,2020
Due to related parties, repaid during the 2021 period a Due to others: Promissory notes repaid during the 2021 period a Notepayable,includingaccrued interest of$10,143(Dec 31,2020 ‐$55,336) b	‐ 780,903 ‐ 324,995 265,075 305,335
	265,075 1,411,233

• a) These promissory notes, along with accrued interest up to the repayment date, were repaid in February 2021 in conjunction with the Non‐brokered Private Placement.

• b) This promissory note accrues interest at a rate of 12% per annum compounded annually. Until March 1, 2021, this promissory note was payable on demand. Effective March 1, 2021, the terms of the promissory note were modified to recharacterize $4,932 of accrued interest to principal and to extend the maturity date to April 1, 2022.

16) CONVERTIBLE DEBENTURES

The Debentures accrue interest at a rate of 15% per annum and originally matured March 1, 2021. The remaining convertible debentures outstanding were modified effective March 1, 2021 to recharacterize a portion of the accrued interest payable to convertible debenture principal on the same terms as the original convertible debentures, and to extend the maturity date to April 1, 2022.

The principal of the Debentures, plus any accrued and unpaid interest thereon, are redeemable by the Corporation and retractable by the holder of the Debenture, at the option of such party. The holder of the Debenture also has the option to convert the principal amount of the Debentures, plus any accrued and unpaid interest thereon, at the greater of: (i) $0.37; or (ii) the last closing price of the Corporation’s common shares. The debentures are secured by a general security agreement granted by the Corporation.

The following table summarizes the outstanding balance and changes in the amounts recognized in the components of the convertible debentures during the six months ended June 30, 2021 and 2020:

	In $
	June 30, 2021 June 30,2020
Beginning balance as at December 31, 2020 and 2019 Repayments Accrued interest recharacterized as principal Interest accretion expense on warrants and legal	653,904 635,255 (202,008) ‐ 71,116 ‐ 3,104 9,325
Ending balance of convertible debentures	526,116 644,580

Total interest for the three and six months ended June 30, 2021 relating to the convertible debentures, including coupon interest and accretion of issuance costs, is $19,676 and $43,059 (June 30, 2020 ‐ $29,165 and $58,331).

18 | P a g e G A B Y I n c .

In Canadian dollars, unless otherwise stated (Unaudited)

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

17) LEASE LIABILITIES

The Corporation is obligated under various lease agreements, all of which require escalating payments. The current payment as of June 30, 2021 is shown in the summary below, and the future escalating payments are reflected in the estimated future payment tables below. Except as noted below, management has determined that it is reasonably certain that GABY will exercise all options to extend the leases. Accordingly, the lease terms used to calculate the lease liabilities include the renewal periods where applicable. A summary of long‐term lease obligations is set forth below.

Finance leases, all secured by asset financed, due: Monthly instalments (CAD) including interest Interest	In $
	Jun 30, 2021 Dec 31, 2020
California, USA facilities Sonoma Pacific Distribution Sept 2022 with extension to Sept 2027 9,883 11.17% Miramar Professional Services May 2025 with extension to May 2030 54,774 8.00% Feb 2023, five‐year extension available but not included in the lease term 10,050 8.00% Wild West Industries Jan 2025, with extension to Jan 2030 31,500 8.00%	582,092 624,949 5,878,174 ‐ 192,996 ‐ 2,616,032 ‐
Production equipment – repaid in 2021	9,269,294 624,949 ‐ 5,712
Total lease liabilities Less current portion	9,269,294 630,661 (640,845) (61,504)
Long‐term lease liabilities	8,628,449 569,157
Estimatedpayments on finance leases are as follows	In $ 638,133 1,494,940 1,430,988 1,452,568 1,496,263 6,595,234 13,108,126 (3,838,832) 9,269,294 262,660 785,830 787,744 877,449 998,730 5,556,881 9,269,294
Remainder of 2021 2022 2023 2024 2025 Thereafter
Total future minimum lease payments Less amount representinginterest
Finance lease obligations
Estimatedprincipal repayments are as follows
Remainder of 2021 2022 2023 2024 2025 Thereafter

19 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

A reconciliation of the balance of lease liabilities for the six months ended June 30, 2021 and 2020 is as follows:

	In $
	June 30, 2021 June 30, 2020
Beginning balance as at December 31, 2020 and 2019 Acquired on business acquisition Divestitures Total cash outflows for leases Variable lease payments not included in the measurement of lease liabilities Portion of lease payments allocated to interest expense Guarantee fee – GABY warrants Guarantee fee for Mankind leases – share‐based compensation to KMP Effect of foreign exchange	630,661 6,748,329
	8,888,474 ‐
	‐ (5,913,531)
	(390,781) (490,221)
	54,180 95,113
	206,880 269,088
	‐ (10,591)
	17,937 ‐
	(138,057) 336,294
Balance, end ofperiod	9,269,294 1,034,481
Currentportion of lease liabilities	(640,845) (117,893)
Non‐currentportion, end ofperiod	8,628,449 916,588

See Note 6 for information regarding the related right‐of‐use assets and depreciation of those assets.

20 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

18) LONG‐TERM DEBT

Long‐term debt consists of the following at June 30, 2021 and December 31, 2020:

Long‐term debt consists of the following at June 30, 2021 and December	31, 2020:
Repayable in monthly instalments, including interest, of: Interest	Maturity	In $
		Jun 30, 2021 Dec 31,2020
Mankind acquisition note payable–Note a 10.00%	Apr 2028	31,637,850 ‐
Vehicle finance loans secured by the vehicles financed: USD 448 4.90% USD 875 1.90% USD 707 1.90% USD 743 2.90% USD 620 5.24% USD 1,150 5.24% USD 1,150 5.24%	Sep 2023 Apr 2023 Apr 2023 Jun 2023 Sep 2022 Sep 2022 Sep2022	14,153 17,586 22,355 29,414 18,922 24,646 20,582 26,497 10,380 15,072 20,610 29,322 20,610 29,322
		127,612 171,859
Long‐term debts held by Mankind on acquisition: WWI acquisition note payable (Note b) 6.00% WWI loan agreement(Note c) 18.50%	Jan 2022 Dec 2022	384,617 ‐ 543,452 ‐
		928,069 ‐
Government assistance loans, net of discount: Canada Emergency Business Account (“CEBA”) loan, interest free and eligible for 25% debt forgiveness if 75% repaid by December 31, 2022. Otherwise, the loan converts on that date into a 3‐year note bearing interest at 5% per annum US government assistance loans, bearing interest at 3.75% per annum, repayable over a term of 30 years with payments being deferred until July 2021, after which the loans will require aggregatepayments of USD 1,212per month		31,084 28,268 99,656 92,469
		130,740 120,737
Total long‐term debt Less: currentportion		32,824,271 292,596 (817,852) (85,400)
		32,006,419 207,196

• a) The Corporation issued a secured non‐convertible promissory note for USD 25.5 million bearing interest at a rate of 10% per annum as part of the consideration for the Mankind acquisition. The promissory note requires quarterly interest‐only payments of the interest incurred in the quarter capped at USD 500,000 per quarter, with any additional interest incurred to be accrued and paid with the next principal payment. The principal is required to be paid as follows: USD 5 million at the end of years two, four, and six, with the remaining USD 10.5 million due at the end of year seven. The promissory note is secured by a pledge of all issued and outstanding shares of MPS.

• b) Upon acquisition of Mankind, MPS held a note payable to the former shareholders of WWI that bears interest at a rate of 6% per annum and requires principal payments of USD 18,000 plus interest due monthly thereafter through November 2021, USD 20,000 plus interest due in December 2021, and a final balloon payment of USD 200,000 plus interest due in January 2022. The note payable is secured by a pledge of 25,000 shares of MPS.

• c) Upon acquisition of Mankind, WWI held a note payable to a private lender for USD 500,000, the proceeds of which were used for the development and growth of the Kind Republic brand. The loan is secured by substantially all

• 21 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

assets of Mankind. The loan accrues interest at a rate of 18.5% per annum and requires blended monthly principal and interest payments of USD 28,053. All amounts advanced shall bear interest for not less than 12 months; if the advance is repaid before that time, the interest for the remainder of the one‐year period will be payable at that time. The loan will be fully due and payable two years after the date of the first required interest payment. In addition to making the required payments, the Corporation also will be required to meet various covenants to avoid an event of default. In the event of a continuing default under the terms of the loan agreement, all amounts owing would become due on demand and interest of an additional 10% per annum could be charged on the outstanding principal balance at the option of the lender.

Estimated principal repayments, net of amortization of discounts, are as follows:

Remainder of	2021	338,182
2022		730,668
2023		6,218,470
2024		(749)
2025		6,203,010
Thereafter		19,334,690
		32,824,271

19) OTHER LONG‐TERM LIABILITIES

19) OTHER LONG‐TERM LIABILITIES
In$, Balance comprised of:	Jun 30, 2021 Dec 31,2020
Deferred tax liability Estimated liabilityfor uncertain taxpositions1	239,497 16,729 6,124,950 ‐
	6,364,447 16,729

1 See description of this liability in Note 12 and description of the related indemnification asset in Note 8

22 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

20) SHARE‐BASED COMPENSATION AND PAYMENTS

Amounts recognized from share‐based payment transactions recognized are as follows:

In $ Note	In $ Note	Three months ended Six months ended	Three months ended Six months ended
		June 30, 2021	June 30, 2020 June 30, 2021 June 30, 2020
Included in operating expenses: Stock option plan employee compensation and consulting fees a Consulting fees settled through issuance of warrants RSU plan employee compensation b Forfeiture of options Amortization of prepaid share‐based payment Shares for services – KMP Shares for services – other			156,607 76,268 357,221 4,000 ‐ 4,000 40,086 202,153 44,576 (301,015) (34,123) (398,978) ‐ ‐ 27,573 ‐ 140,000 ‐ ‐ 279,884 ‐
		37,150
		‐
		117,449
		(34,123)
		‐
		95,000
		228,634
Total share‐based payments included in operating income (loss) Lease guarantee fee paid or accrued to be paid in shares issued to certain KMP		444,110	(100,322) 664,182 34,392 ‐ 17,937 ‐
		17,937
Total share‐based payments included in net loss Settlement of accounts payable in lieu of cash c Settlement of amounts due to a director in lieu of cash payment		462,047	(100,322) 682,119 34,392 119,369 665,939 218,369 ‐ ‐ 33,898
		665,939
		‐
Total share‐basedpayments		1,127,986	19,047 1,348,058 286,659
a. Stock option plan Set out below are summaries of activity in respect of the Corporation’s stock June 30, 2021 Average exercise price per option Number of options			options for the periods ended as follows: June 30, 2020 Average exercise price per option Number of options $0.30 11,790,000 $0.30 (5,625,000) $0.30 6,165,000 $0.27 1,813,333
	June 30, 2021
	Average exercise price per option Number of options
Opening Forfeited	$0.30 6,165,000
	$0.27 (1,290,000)
Closing	$0.31 4,875,000
Vested and exercisable atperiod end	$0.29 3,008,334

Share options outstanding as at June 30, 2021 and December 31, 2020 have the following range of exercise prices and weighted average remaining contractual life:

23 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

GABY INC. Notes to the Condensed Interim Consolidated Financial Statements In Canadian dollars, unless otherwise stated (Unaudited)
June 30, 2021 Exercise price Number Weighted average contractual life in years	December 31, 2020
	Number Weighted average contractual life in years
$0.125 150,000 3.39 $0.270 1,450,000 3.27 $0.286 1,250,000 2.18 $0.350 25,000 2.82 $0.360 2,000,000 3.10	150,000 3.88 2,740,000 3.76 1,250,000 2.67 25,000 3.32 2,000,000 3.59
4,875,000 2.92	6,165,000 3.49

The amount included in operating expenses for directors’, officers’ and consulting services received, net of forfeitures, for the three and six months ended June 30, 2021 is $3,027 and $42,145 (June 30, 2020 – negative $144,408 and negative $41,757) and is classified as contributed surplus on the Corporation’s consolidated statement of financial position. Of the foregoing amounts, $28,175 and $57,895 was in respect of KMP for the three and six months ended June 30, 2021 (June 30, 2020 – negative $138,102 and negative $66,692).

b. Restricted share units (“RSUs”)

Set out below is a summary of RSUs activity for the six months ended June 30, 2021 and 2020:

Number of RSUs	June 30, 2021 June 30,2020
Opening Granted Forfeited Issued as common shares	16,375,000 ‐ 7,250,000 8,995,000 ‐ (655,000) (1,573,334) ‐
Closing	22,051,666 8,340,000
Vested atperiod end	940,002 ‐

The amount included in operating expenses for directors’, officers’ and consulting services received for the three and six months ended June 30, 2021 is $117,449 and $202,153 (June 30, 2020 ‐ $40,086 and $44,576) and is classified as contributed surplus on the Corporation’s consolidated statement of financial position. Of the foregoing amounts, $81,026 and $133,033 was in respect of KMP for the three and six months ended June 30, 2021 (June 30, 2020 ‐ $30,627 and $31,965).

24 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

• c. Shares issued for settlement of accounts payable

c. Shares issued for settlement of accounts payable
Six months ended: Shares issued in respect of:	June 30, 2021 June 30, 2020
	Number $ Number $
Consulting service fees payable i Consulting services fees payable to related party ii Legal feespayable iii	2,748,703 275,565 1,646,695 94,500 ‐ ‐ 1,834,210 123,869 3,394,553 390,374 ‐ ‐
Total common shares issued	6,143,256 665,939 3,480,905 218,369

• i) Various consultants agreed to receive payment for consulting fees in shares rather than cash. The Corporation measured the fair value of services received as invoiced, as measured when such services were previously paid in cash. The common shares were measured using five‐day weighted‐average share price on date of issuance at an average of $0.10 per share. The 2021 amount includes $8,000 related to 200,000 warrants issued along with the shares to one of the consultants.

• ii) A consultant agreed to receive payment for current and future consulting fees in shares rather than cash. The Corporation measured the fair value of services received as invoiced as measured when such services were previously paid in cash. The common shares were measured using five‐day weighted‐average share price on date of issuance at an average of $0.07 per share.

• iii) A legal firm agreed to receive payment for legal fees in shares rather than cash. The Corporation measured the fair value of services received as invoiced, as measured when such services were previously paid in cash. The common shares were measured using five‐day weighted‐average share price on date of issuance at an average of $0.12 per share.

25 | P a g e G A B Y I n c .

Notes to the Condensed Interim Consolidated Financial Statements

GABY INC.

In Canadian dollars, unless otherwise stated (Unaudited)

21) SHARE CAPITAL AND CONTRIBUTED SURPLUS

Authorized share capital

The Corporation is authorized for an unlimited number of shares without nominal or par value as follows:

Unlimited number of Class A common voting shares

Unlimited number of Class B non‐voting, retractable, redeemable, preferred shares, issuable in series

Common shares issued and outstanding and Contributed surplus

A reconciliation of the Corporation’s Common shares and Contributed surplus is as follows:

	Share capital
Note	Class A common voting shares	Contributed surplus	Total transaction
	Number $	$	$
Balance as at December 31, 2019 Issuance of shares to settle indebtedness to company controlled by director and officer Issuance of shares to director from treasury Stock option expense 20 RSU expense 20 Stock option forfeitures 20 Warrant forfeitures b Share‐based payments 20 Issuance of shares to settle short‐term notespayable	205,775,825 43,068,525 16,666,666 1,083,333 3,003,003 250,000 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3,480,905 218,369 462,497 46,250	5,373,688 ‐ ‐ 357,221 44,576 (398,978) (25,490) 14,195 ‐	48,442,213 1,083,333 250,000 357,221 44,576 (398,978) (25,490) 232,564 46,250
Closing balance, June 30, 2020	229,388,896 44,666,477 5,365,212 50,031,689
Balance as at December 31, 2020 Issuance of Units a Issuance of shares for business acquisition 3 Spin off of Subscription Receipts a Share‐based payments 20 RSUs issued as common shares 20b Equity issuance costs a Stock option expense 20 RSU expense 20	237,793,408 45,074,695 80,140,444 3,446,039 157,894,737 6,789,474 172,929,123 7,435,952 8,264,710 843,977 1,573,334 66,821 ‐ (916,274) ‐ ‐ ‐ ‐	5,721,708 560,983 ‐ 1,210,504 8,000 (66,821) 319,703 42,144 202,153	50,796,403 4,007,022 6,789,474 8,646,456 851,977 ‐ (596,571) 42,144 202,153
Closing balance, June 30, 2021	658,595,756 62,740,684 7,998,374 70,739,058

a. Private Placement

On February 4, 2021, the Corporation closed a brokered private placement of subscription receipts of the Corporation (the “Brokered Private Placement”) together with its non‐brokered private placement of units of the Corporation (the “Non‐Brokered Private Placement”) for aggregate gross proceeds of $12.7 million.

Pursuant to the Brokered Private Placement, the Corporation issued 172,929,123 subscription receipts of the Corporation (“Subscription Receipts”) at a price of $0.05 per Subscription Receipt. The total value of $8,646,456 was bifurcated between share capital and contributed surplus when the Subscription Receipts were converted to Units in June 2021 based

26 | P a g e G A B Y I n c .

GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

on the relative fair value of the common shares and Warrants issued.

Each Subscription Receipt represented the right to receive, without payment of additional consideration or further action on the part of the holder thereof, one unit of the Corporation (each, a “Unit”) upon the later of: (i) the satisfaction of certain escrow release conditions; and (ii) the date that is the earlier of: (A) June 5, 2021; and (B) the second business day following the filing of a qualifying prospectus.

Each Unit consists of: (i) one GABY Share; and (ii) one GABY Share purchase warrant (each, a “Warrant”). Each Warrant will entitle the holder to purchase a GABY Share at an exercise price of $0.09, at any time up to 24 months following the date of issuance; provided that if, at any time prior to the expiry date of the Warrants, the volume weighted average trading price of the common shares on the CSE, or other principal exchange on which the GABY Shares are listed, is greater than $0.18 for 5 consecutive trading days, the Corporation may, within 10 business days of the occurrence of such event, deliver a notice to the holders of the Warrants (the “Acceleration Right”) accelerating the expiry date of the Warrants to the date that is 30 days following the date of such notice (the “Accelerated Exercise Period”). Any unexercised Warrants will automatically expire at the end of the Accelerated Exercise Period.

The Corporation issued Broker Warrants valued at $319,703 (see Note 21c) and paid other fees and expenses of $596,571, for aggregate equity issuance costs of $916,274 which was offset against share capital.

Pursuant to the Non‐Brokered Private Placement, the Corporation issued 80,140,444 Units at a price of $0.05 per Unit. The total value of $4,007,022 has been bifurcated between share capital and contributed surplus based on the relative fair value of the common shares and Warrants.

b. Warrants

Set out below are summaries of warrants activity for the six months ended June 30, 2021 and 2020:

	June 30, 2021 Average exercise price per warrant Number of warrants	June 30, 2020
		Average exercise price per warrant Number of warrants
Opening1 Granted 21a Expired Forfeited	$0.38 38,404,193 $0.09 253,269,567 $0.38 (34,254,193) ‐ ‐	$0.38 78,590,766 $0.28 2,000,000 ‐ ‐ $0.54 (500,000)
Closing	$0.12 257,419,567	$0.37 80,090,766
Vested and exercisable atperiod end	$0.12 254,819,567	$0.37 79,490,766

Warrants outstanding as at the end of the periods have the following range of exercise prices and weighted average remaining contractual lives:

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

GABY INC. Notes to the Condensed Interim Consolidated Financial Statements In Canadian dollars, unless otherwise stated (Unaudited)
June 30, 2021 Exercise price Number of warrants Weighted average contractual life in years	December 31, 2020
	Number of warrants Weighted average contractual life in years
$0.09 253,069,567 1.83 $0.15 200,000 0.81 $0.20 ‐ $0.35 2,000,000 1.83 $0.37 ‐ ‐ $0.375 ‐ 0.38 500,000 1.86 $0.42‐$0.65 1,650,000 0.85	‐ ‐ ‐ ‐ 2,000,000 2.33 650,000 0.16 34,104,193 0.47 1,650,000 1.34
257,419,567 2.44	38,404,193 0.60

c. Broker Warrants

The Corporation from time to time issues instruments exercisable for the purchase of common shares and Warrants for the purpose of compensating brokers or agents in connection with financing transactions, which are referred to above as Broker Warrants. The balance included in Broker Warrants is comprised of the following:

Broker Warrants. The balance included in Broke	r Warrants is comprised of the following:
	June 30, 2021 December 31, 2020
	Number $ Number $
Broker Warrants – February 2021 i Broker Warrants – June 20191	7,992,569 319,703 ‐ ‐ ‐ ‐ 4,522,634 927,140
	319,703 927,140

1 Reflects expiration of these broker warrants in June 2021

i. Broker Warrants – February 2021

The Corporation issued Broker Warrants to the brokers in the February 2021 Brokered Private Placement. Each Broker Warrant entitles the holder to acquire one common share and one warrant at a combined price of $0.05 for a period of 24 months following the Escrow Release Date of June 5, 2021. Each warrant acquired through exercise of the Broker Warrants entitles the holder to acquire one common share at a price of $0.09 per share for a period of 24 months from the Escrow Release Date. The weighted average remaining life of the Broker Warrants is 1.93 years.

If at any time after the date of issuance, the volume weighted average trading price per common share is equal to or greater than $0.18 for any five consecutive trading days, the Corporation shall be entitled, at the sole option of the Corporation, within ten business days of such event, to accelerate the Expiration Date to the date that is thirty days following the delivery of a written notice of acceleration to the holder.

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

22) DIRECT INVENTORY COSTS

22) DIRECT INVENTORY COSTS
In $ Balance comprised of:	Three months ended June 30, Six months ended June 30,
	2021 2020 2021 2020
Salaries and benefits Direct material Other direct costs	521,486 74,485 740,338 511,536 6,068,989 486,741 8,864,163 1,480,297 447,566 10,568 475,883 47,690
	7,038,041 571,794 10,080,384 2,039,523

23) ALLOCATED INDIRECT COSTS

23) ALLOCATED INDIRECT COSTS
In $ Balance comprised of:	Three months ended June 30, Six months ended June 30,
	2021 2020 2021 2020
Salaries and benefits Production licences and permits Production facility costs Depreciation of production equipment Other overhead costs	24,802 ‐ 40,437 ‐ 11,934 41,568 19,057 81,888 90,912 7,086 111,511 57,091 74,425 13,906 88,336 26,890 8,865 (815) 17,169 29,305
	210,938 61,745 276,510 195,174

24) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In $ Balance comprised of:	Three months ended June 30, Six months ended June 30,
	2021 2020 2021 2020
Salaries and benefits Consulting fees Administrative costs Advertising and promotion Professional fees	1,618,067 888,690 2,039,864 2,201,876 129,656 317,155 341,532 712,408 791,077 164,633 1,037,107 514,862 332,402 36,290 428,437 71,124 330,323 205,286 465,687 381,467
	3,201,525 1,612,054 4,312,627 3,881,737

25) LOSS PER SHARE

Basic loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding during the period. The potentially dilutive common shares issuable on the outstanding Warrants, Broker Warrants, Stock Options, and RSUs are non‐dilutive and are therefore excluded from the diluted loss per share for the periods in which they were outstanding. The weighted average numbers of shares outstanding for the three and six months ended June 30, 2021 was 526,413,019 and 407,695,339 (three and six months ended June 30, 2020 – 228,398,710 and 225,672,574).

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

26) NON‐CASH TRANSACTIONS AND CASH FLOW DISCLOSURES

The Corporation paid $653,425 in income taxes for the three and six months ended June 30, 2021 (2020 ‐ $nil both periods).

Non‐cash transactions took place during the three‐ and six‐month periods as follows:

June 30, 2021, In$	3 months 6 months
1 Non‐cash equity issuance costs: Decrease in restricted cash Increase in accounts receivable Increase in accounts payable Increase in contributed surplus Decrease in share capital (equity issuance costs recorded) 2 Assumption of bank indebtedness by certain KMP Increase in accounts payable to related party Decrease in bank indebtedness 3 Business acquisition (nets to cash paid amount): Increase in share capital Increase in accounts receivable (see Note 4) Increase in goodwill and intangible assets Increase in deferred tax liability Increase in long‐term debt Increase in indemnification asset Increase in assets (from Mankind) Increase in liabilities (from Mankind) 4 Payment of accounts payable through issuance of common shares: Increase in share capital Increase in contributed surplus Decrease in accounts payable Loss on settlement of debts 5 Spin off of Subscription Receipts: Decrease in share issuance obligation Increase in common shares Increase in contributed surplus 6 Issuance of RSUs as common shares Increase in common shares Decrease in contributed surplus
	‐ 325,226
	‐ 13,623
	‐ 284,968
	‐ 319,703
	‐ 916,274
	‐ 155,370
	‐ 155,370
	6,789,474 6,789,474
	959,547 959,547
	44,968,363 44,991,862
	375,238 375,238
	32,066,250 32,066,250
	5,915,159 5,915,159
	14,626,800 14,626,800
	20,974,907 20,974,907
	657,939 657,939
	8,000 8,000
	641,374 641,374
	24,565 24,565
	8,646,456 8,646,456
	7,435,952 7,435,952
	1,210,504 1,210,504
	66,821 66,821
	66,821 66,821

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

GABY INC. Notes to the Condensed Interim Consolidated Financial Statements In Canadian dollars, unless otherwise stated (Unaudited)
June 30, 2020, In$	3 months 6 months
1 The following adjustments were recorded as a result of lease terminations: Increase in accounts receivable Decrease in property and equipment, net (including right of use assets) Decrease in security deposits Decrease in lease liabilities Increase in accrued liabilities Gain on lease terminations 2 Payment of consulting fees through issuance of common shares: Increase in common shares Decrease in accounts payable Loss on settlement of debts 3 Extinguishment of debts through issuance of common shares: Decrease in promissory notes Decrease in amounts due to related party Decrease in short‐term notes payable Increase in common shares Loss on foreign exchange Gain on conversion of debt
	‐ 16,500
	4,985,925 5,632,115
	170,777 184,775
	5,158,727 5,810,676
	2,025 2,025
	‐ 8,261
	119,369 218,369
	105,750 204,750
	13,619 13,619
	‐ 1,066,453
	‐ 33,898
	‐ 98,093
	‐ 1,129,583
	‐ 6,013
	‐ 74,874

27) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Corporation's current financial instruments include cash, accounts receivable, accounts payable and accrued liabilities, short‐term notes payable, promissory notes payable, and convertible debentures and are measured at amortized cost. The carrying values of these instruments approximate their fair value due to their short‐term maturities. The Corporation’s non‐current financial instruments include lease liabilities and long‐term debt, which are measured at amortized cost.

28) SEGMENTED INFORMATION

The Corporation’s chief operating decision makers are the Chief Executive Officer, the President and the Chief Financial Officer. They review the operating performance of the Corporation by two segments comprised of licensed and unlicensed channels, both of which are or were in the manufacturing, distribution, and marketing of cannabis or CBD products to address a variety of recreational and medical purposes including dietary and health concerns. The licensed channel includes cannabis‐related products to which the manufacturing, sale and distribution are subject to regulation. The unlicensed channel includes all other wellness products not subject to the licensing requirements in respect of cannabis. The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in the Annual Financial Statements. The chief operating decision makers utilize gross profit as a key measure in making operating decisions and assessing performance. With the acquisition of Mankind, the Unlicensed segment is immaterial and, accordingly, segmented figures are not presented.

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GABY INC.

Notes to the Condensed Interim Consolidated Financial Statements

In Canadian dollars, unless otherwise stated (Unaudited)

29) SUBSEQUENT EVENTS

Closure of Sonoma Pacific Distribution

In August 2021, management made the decision to shutter operations at Sonoma Pacific Distribution (“SPD”) and consolidate its manufacturing and distribution operations in San Diego, California at Wild West Industries. Management is in the process of terminating or relocating all SPD employees and arranging for termination of leases and other considerations resulting from the closure of SPD. Management expects to shed significant costs going forward and enable further synergies with Mankind as a result of this decision.

Equity issuances

Subsequent to June 30, 2021, the Corporation has issued the following:

• A total of 4,630,415 common shares valued at $196,424 to consultants and others for past and future services

• A total of 17,850,000 RSUs valued at $538,178 based on a share price on date of grant of $0.045 and a forfeiture rate of 33%, which will be recorded as an expense over the three years in which services are received with a corresponding amount recorded as contributed surplus

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